The Department of Health and Human Services announcement relates to the so-called essential health benefits for millions of Americans expected to qualify for coverage sold through state-based insurance exchanges beginning in 2014.

The proposed approach reflects the federal government's commitment to give states flexibility as they set up the exchanges, HHS Secretary Kathleen Sebelius said on Friday.

"The coverage that works in Florida may not work in Nebraska," Sebelius told reporters on a conference call.

Under the approach announced on Friday, states can select an existing health plan to set the benchmark for services included in the essential health benefits package.

As benchmarks, states would be able to choose either: One of the three largest small employer plans in the state; one of the three largest state employee health plans; one of the three largest federal employee health plan options; or the largest health maintenance organization plan offered in the state's commercial market.

As set out in the law, states must ensure the essential benefits package covers services in at least ten categories of care, among them preventive care, emergency services, maternity care and prescription drugs.

Ron Pollack, executive director of healthcare advocacy group Families USA, said that HHS needed to provide "strong oversight and enforcement" of the benefit standards as they are implemented in the states.

"It will be important to ensure that adequate coverage across all ten required benefit categories is provided - marking an improvement over many plans offered today," Pollack said.

HHS said it would take comments on the proposal until January 31. The announcement on Friday addressed only the services and items covered by a health plan, not cost sharing, such as deductibles, co-payments, and co-insurance. HHS plans to address cost in a future announcement.

The essential benefits are perhaps the most anticipated piece of information still awaited by states, employers, health providers and especially insurers under President Barack Obama's landmark healthcare overhaul.

The exchanges are designed to create easy access to an open marketplace of insurance plans and to allow uninsured people and small businesses to band together to negotiate cheaper rates for healthcare coverage, as well as automatically be considered for government subsidies.

HHS has been subject to intense lobbying over the rule as virtually the entire U.S. healthcare system, including insurers such as Aetna Inc and WellPoint Inc, could be affected by it.

The Institute of Medicine, an advisory group to U.S. policymakers, recommended in October that essential benefits stay in line with the cost of insurance in a typical small employer plan, in step with inflation and medical advances.

The healthcare overhaul is designed to extend coverage to an estimated 32 million Americans who are now uninsured.

(Reporting by Lewis Krauskopf; Additional reporting by Anna Yukhananov in Washington; Editing by Lisa Von Ahn, Gunna Dickson, Gary Hill)

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